■ Corporate earnings have deteriorated further. 3Q15 was not a pretty sight. There was a record four misses for every beat. The disappointments were aplenty.
■ Post-results, we have removed ST Engineering and SCI from our top picks, added SingTel into our country picks. Sector weights shift accordingly.
■ Our Index picks are CAPL, CMT, CIT, DBS, IHH, OCBC, SPOST, ST and THBEV. Our small-cap picks include COURTS, FR, GLL, HOBEE, MAGIC, TIAN and VMS.
Banks show initial signs of NPL; SingTel stable, but hit by currency
● Banks’ slowing top lines and rising credit costs had been well anticipated. Provisions (oil and gas, transport) have just started to show up. Undoubtedly, more NPLs will show up, the question being the extent of provisioning at peak NPLs. We think share prices at 1.1x P/BV reflect these negatives. Banks remain OW, and we prefer OCBC.
● Telcos had a flat quarter, with SingTel being held back by weaker associates (weak regional currency.) We raise telcos back to N after recent weakness. Prefer SingTel.
Property: speed bumps for hotels and office ahead
● Home rentals are soft and prices are edging down, though transaction volumes have improved. The auction market is turning more active. We expect the most challenging period ahead is for office and hotels rents, as we hit a supply bump. The new trend in 3Q is a deterioration of industrials’ outlook, with guidance of limited room to raise rents. We prefer CIT, CAPL among developers and MAGIC, CMT for REITs.
Capital Goods & Transport
● There were negative trends aplenty. Net gearing increased as operators/shipyards took more loans and redeemed perpetuals. Trends such as an acute margin squeeze, deferral of contracts and lower utilization of vessels were coming; they finally showed up in 3Q. As EBITDA falls off a cliff, debt covenants are being revised and may lead to higher debt cost. STE is removed from our top picks, as its biggest division starts to splutter. Downgrade the sector to UW, preferring SCI and EZI as exposure, if needed.
● SIA is struggling with a weak Europe and weak cargo; Scoot and Silkair are doing well. We downgrade CD on concerns of taxi contributions turning worse from here.
Gaming and consumer discretionary poor
● GENS results diverged from MBS’s with poor gaming volumes, lower market share and more bad debts. Many consumer names (OSIM, Petra Foods, Super) disappointed on weak demand, partly due to collapsing ASEAN currencies. Plantation stocks saw downstream margins improve (low CPO prices) but their upstream business has been hit by output disappointments. We prefer healthcare names (IHH) in this climate.
Watch the downside
● In light of the deterioration in corporate earnings, we certainly believe that the right move for portfolios must be to be cashed-up. We are overweight banks and property, as we see more earnings resilience and valuation resilience, in these sectors. (Read Report)
Source : CIMB Research